It’s a Good Time to Cut Dividends

Actually they’re not. We have talked before about the theory that a company can never cut its dividend, because it sends a fatal signal that the company is in financial distress and undermines the market’s confidence in the company. Whether or not that theory is normally true, it’s not true now, because everyone is in the same basic distress and there is safety in numbers:

I have thought a lot recently about the adage that “only when the tide goes out do you discover who’s been swimming naked.” I am not sure it’s true? The “nice” thing about a giant exogenous crisis is that—much like an enthusiastic bull market—it flattens the distinctions between good and bad companies. If you made prudent business decisions to build a stable company over the last decade, and then all your revenue stopped because the world shut down, you are in trouble; if you made dumb risky decisions over the last decade, and then all your revenue stopped because the world shut down, you are in roughly the same sort of trouble. In ordinary times, if you cut your dividend it means that you did something bad. Now, if you cut your dividend, it doesn’t mean that you did something bad. It doesn’t mean that you didn’t! It doesn’t mean anything. Good smart prudent companies are cutting their dividends now, everyone is cutting their dividends, which means that if you are a dumb bad company it’s a great time to cut your dividend.